You remember Monty Hall and “Let’s Make a Deal” a popular game show in the 60’s and 70’s? He’d present contestants with a common scenario. There are three closed doors – you win the prize behind the door you choose. A shiny new car is behind one door. Two smelly goats are behind the others. However, you don’t know what’s behind door one, two or three. You choose door number one. Monty opens one of the other doors – one which he knows holds a goat – and asks if you want to switch your choice to the unopened door you didn’t choose. Do you switch or stay?
Many people think that once one door is eliminated, then switching does not matter – they think the probability between the remaining two doors is 50-50. But this is incorrect statistically. And psychologists point to the behavioral phenomena behind the dilemma of “choice” – people prefer to stick with the choice they’ve already made. The pain of sticking to your original choice, even if it turns out to be wrong, is a lot less than the risk of switching a winning hand for a loser.
The math says you should switch because the probability of winning is two out of three; and sticking with your first choice remains at one out of three. Suppose you play this game 600 times. You will correctly pick the right door at the outset about 200 times. But 400 times you’d bring home a goat if you didn’t switch. Monty won’t open the door with the car. So in 400 times, the car will be behind the door you didn’t originally pick. This is similar to the street scam of “three-card monte.” What we intuitively think is a 50-50 probability, is not.
Recently I attended a national conference with some 2,000 fellow advisors in Denver. The four day event was rich with half a dozen keynote speakers, a choice of five dozen education sessions, and conversations with peers and service providers. I’ll share two.
Jay Mooreland, a financial planner and host of website theEmotionalInvestor.org, discussed how advisors can help their clients achieve their financial goals by preventing behavioral biases from sabotaging long-term objectives. He opened with “let’s play a game” and presented two questions. How would you answer?
• A bat and ball cost $1.10 in total. The bat costs $1 more than the ball. How much does the ball cost?
• It takes five machines five minutes to make five widgets. How long would it take a hundred machines to make a hundred widgets?
Moreland’s “game” focused on the human temptation to make mental shortcuts when faced with uncertain situations that often result in foolish decisions. Often, we trade intuition for analysis – the later takes time and effort. Behavioral experts expand the human challenge of making rational decisions in an irrational world in books including MIT professor Dan Ariely’s “Predictably Irrational” and Nobel Laureate and Princeton professor Daniel Kahneman’s “Thinking, Fast and Slow.”
The correct answers to the two questions? They’re five cents, and five minutes. The vast majority of people respond quickly and confidently… and are wrong. And education doesn’t necessarily help. More than half of Harvard, Princeton and MIT students routinely answer incorrectly.
International economist Dambisa Moyo warned us of the risks of being blindsided by unaddressed negative trends. You may have heard of Ms. Moyo from her book “Dead Aid, Why Aid is Not Working and How There is Another Way for Africa,” Bill Gates’ criticism, and her fiery response last year. Nevertheless, Ms. Moyo, a Zambian national and former economist for the World Bank, said not to be overly optimistic of some short-term advancements such as US job gains (are they “good” jobs?) and the temporary fixes from quantitative easing. Rather she had a less sanguine view longer term from four trends – technological advancements (putting unskilled out of work), changing demographics (aging populations), income inequality, and resource scarcity.
I share these two nuggets from Denver for a couple of reasons:
• Recognize that we’re human. Emotions and biases can hinder rational decision making.
• Have a process and plan with updated assumptions.
• Stay focused on the things we can control and make adjustments – short term results can be misleading when judging long-term success.
• Life’s a lot more interesting than a simple choice of “Door number one, two or three?”